The Paycheck Protection Program 1099 Form Breakdown
One of the most talked about economic components of the CARES Act is the Paycheck Protection Program (PPP) administered by the SBA. The Paycheck Protection Program (PPP) was designed to provide financial relief to freelancers or business owners due to the impacts of the COVID-19 coronavirus and it can impact Form 1099-MISC employers and workers in a variety of ways including who can apply and be approved for a loan and the potential tax implications of having the loan forgiven (if it is eligible to be forgiven). PPP loan guidance for 1099 independent contractors and sole proprietors has a few nuances that do not typically impact traditional C-Corps and S-Corps.
A Quick Overview of the Paycheck Protection Program for a Small Business
PPP is designed to help small businesses keep staff employed during the COVID-19 pandemic by allowing employers to take out a loan, with the potential of having the loan forgiven, for the business’s average monthly payroll expense multiplied by 2.5 (1 ½ months of payroll expenses).
Assuming the money from the loan is spent on qualified items, such as payroll, rent, mortgage interest, and utility payments, the loan can be forgiven which means it is essentially a grant. Along with spending the PPP funds on appropriate expenses, it must be spent within the "covered period". Originally, this was an eight-week period following receipt of the loan funds but the PPP Flexibility Act extended the time period to between 8 and 24 weeks. It is up to the business owner to choose the time period they will use.
Fortunately, self-employment does not exclude you from receiving PPP funds. It is important to note that as an independent contractor or self-employed individual, payments made to other contracts are not considered payroll expenses and are not deductible.
You will work directly with your lender even though the Small Business Administration is administering the program.
PPP and Sole Proprietors, Freelancers, and Independent Contractors
Sole proprietors do not have traditional employees if any employees at all. Since there are no employees, there are no payroll costs to use when calculating the PPP amount. Fortunately, there is a still way for sole proprietors to take advantage of the Paycheck Protection Program and receive financial assistance or coronavirus aid to offset some of the business impacts of the pandemic. Instead of reporting payroll costs, a sole proprietor will use the net business income reported on Schedule C. As with other types of businesses, your business had to have been operational prior to February 15, 2020. The same strategy should be used by new freelancers and independent contractors.
NOTE: If your net income is negative on the Form 1040, Schedule C you will not be eligible for the PPP loan because there is no self-employment income to use in the calculations.
Applicants should read the U.S. Treasury’s PPP Frequently Asked Questions for any updates or for more information.
What is the Eligibility Criteria for a Self-Employed PPP Loan?
· You must have been operating prior to February 15, 2020.
· You must be living and working in the United States.
· You must have a net profit for the year of 2019.
· You must be generating income as a sole proprietor, independent contractor, or self-employed individual.
· You must file a Form 1040, Schedule C for the year of 2019.
What If Your Sole Proprietorship Was Not Operational Prior to June 30, 2019?
If you are a sole proprietor and started your business after June 30, 2019 you may not have a 2019 Schedule C. To apply for a PPP loan, you will need a Schedule C regardless of whether you were required to file one in 2019. The best solution is to complete a Schedule C for January to February 2020. This can be used during the PPP application process
Applying for a PPP Loan as a 1099 Contractor
If you are applying for a PPP loan as an independent contractor you will complete the same application through a bank/alternative lender as any other business. The difference is there are a few different documents you will be required to provide.
· You will need to complete the PPP Loan Application
· You will need to provide a driver’s license or another form of government identification.
· You will need to provide a Statement of Good Will. This is a signed statement certifying that you will only use the funds to pay for costs approved by the program.
· You will need to provide a completed Form 1040, Schedule C. This acts as your statement of net profits during the period in question.
· You will need to provide tax forms 940 and/or 941 between January 1, 2019 and the time of application. This is used to indicate if there are any payroll costs. Fortunately, if you do not have any traditional payroll costs, the Schedule C will be used.
· You will need to provide a record of all business costs including invoices, bank statements, bills, and other costs like utilities, rent, and so on
· You will need to provide a waiver from your existing lender(s). If you have any outstanding balances on business loans, you will need confirmation from those lenders that you can afford to take on more unsecured debt even though it can be forgiven.
What If You Already Received an Economic Injury Disaster Loan?
The EIDL program was created to provide economic relief to businesses that experience a temporary loss of revenue due to COVD-19. Unlike the PPP loan, the EIDL loan is not forgivable (although the related EIDL Advance is forgivable). Fortunately, you can apply for a PPP loan and use the funds to refinance your EIDL loan if you received your EIDL loan between January 31, 2020 and April 3, 20202.
If your EIDL loan was not used for payroll costs it will not impact your PPP loan eligibility, but it will not be used to refinance your EIDL loan. If you did use your EIDL for payroll costs, the PPP loan can be used to refinance it which will provide an opportunity for the loan to be forgiven.
Can You Receive a Second PPP Loan?
If you are a qualifying independent contract you can receive a second disbursement of fund by applying for the “Second Draw”. The same rules will apply to the second draw as the first applications. It requires the same documentation and same set of qualifying rules - plus a 25% revenue reduction rule.
Does the 25% Revenue Reduction Rule Apply?
For the second draw, a widely discussed guideline is the 25% revenue reduction rule. This rule states that you must have experienced a 25%+ reduction is revenue to apply. Fortunately for most independent contractors and sole proprietors this rule only applies to loans requesting more than $150,000. In most instances, you will be required to certify this revenue reduction rather than providing documentation.
How Is the 25% Reduction Calculated?
Business owners compare gross receipts of the business for a quarter in 2020 to the same quarter in 2019 to determine if there was a 25% reduction.
If you were not in business during the first or second quarter of 2019 but were in business in the third or fourth quarter of 2019 then you may use those quarters.
If you were not in business at all in 2019 but were in business before February 15, 2020 then you will use the gross receipts from those quarters and compare then to the first quarter of 2020 to determine if there was a 25% reduction.
What if You Did Not Take a First PPP Loan?
There is still funding for a first draw PPP loan so you will be able to apply based on the same terms as the original CARES Act regulations. This means you will not need to meet the 25% revenue loss requirement for the second draw. If you were to take your first draw and later take another one, the 25% revenue loss requirement would be in effect.
Can You Increase the Amount of Your First PPP Loan Draw Instead of Receiving a Second PPP Loan?
If you do not meet the 25% revenue loss requirement for a second PPP loan but still need additional financial assistance, you may qualify for an increase in your first loan amount but there are some specific circumstances that are required. Most importantly, the SBA must not have remitted a PPP loan forgiveness payment to your lender. If you have already applied for and received loan forgiveness for your first loan you cannot increase the amount.
You will need to work with your lender to determine if you qualify for an additional draw. If you returned all or part of your first PPP loan you can apply for an amount equal to the difference between the amount retained and the maximum amount applicable. If you did not initially accept the maximum amount available, you can request a modification to the loan request so that you can borrow the full amount.
Partnership Specific Circumstances
If you are in a partnership that applied based on the partnership’s employees but did not include any partner compensation or seasonal business which would increase the qualifying amount, the partnership can increase the total draw amount for the first PPP loan. Like other business types, the total increase will be difference between the original loan draw and what the maximum availability would be if partner compensation were included.
Paycheck Protection Program Loan Forgiveness
Both the first and second round of PPP loans are eligible for forgiveness. The loans are entirely forgiven if they are spent for expenses they were designed to cover – primarily payroll. Both rounds require you to submit the forgiveness request to the lender who provided you with the PPP funds.
There are three forgiveness applications: Form 3508, Form 3508EZ, and Form 3508S. Form 3508 is the standard document used to request loan forgiveness and requires the most calculations. Which form to use is primarily determined by how much you borrowed and whether employee salaries or the number of employees was reduced.
Form 3508EZ is used if you are self-employed or have employees but did not reduce their wages by 25%, did not reduce your employee count, and did not cut their hours. Form 3508S can only be used if you took out a loan of $150,000 or less.
Will You Receive a 1099-C for Cancelation of Debt Income if Your PPP Loan is Forgiven?
Typically, when any form of debt over $600 is forgiven, the debt holder files a 1099-C. From the perspective of a taxpayer, the amount of debt forgiven is considered income. The IRS refers to it as Cancelation of Debt Income. You report any amounts forgiven as income when you file your annual income taxes unless you qualify for an exclusion or exception. Common exclusions include debt canceled due to bankruptcy and debt canceled due to insolvency.
Lenders Are Not Filing Form 1099-C for Forgiven PPP Loans
The Internal Revenue Service notified lenders in September 2020 that they should not do tax filings for cancelation of debt information or provide the payee statements when reporting the amount of PPP loans forgiven. The IRS has stated this is being done solely to reduce the risk of confusion on the part of borrowers. It also eliminates the risk of taxpayers receiving IRS Letter CP2000 (Under-reporter Notices) which are used when the information the IRS receives from lenders/employers does not match the amount of income a taxpayer claims on their tax returns.